Business groups call for government intervention on credit

Conditions will worsen for UK businesses over the next three months as a result of the squeeze on credit unless the government takes further action, the CBI has warned.

In the CBI’s latest ‘access to finance’ survey, 63 per cent of firms that had sought finance reported a deterioration in the availability of credit and lending.

Some 59 per cent believed that the situation will get worse over the course of the next quarter.

The CBI said that the findings of the survey indicated that the credit crunch is having a continuing and adverse impact on large numbers of businesses.

Almost two in five firms (37 per cent) said that they had reduced their workforces over the past three months because of problems directly related to the lack of credit.

In the case of larger employers that proportion climbed to nearly half, with 40 per cent also paring back on production levels.

The cost, as well as the availability, of finance has added to business difficulties. New borrowing costs, the CBI said, are now more likely to be pegged to LIBOR, the rate of interest charged on lending between banks, rather than the Bank of England’s official rate. Despite the recent falls in LIBOR, overall borrowing costs are still rising as are arrangement fees, an issue compounded by slower, more complex administration.

There are ongoing difficulties with trade credit insurance too. Two-fifths (39 per cent) of the firms surveyed use the insurance to cover the supply of goods, and two-thirds (65 per cent) of these companies reported that its availability has worsened in the last three months, threatening their ability to secure contracts and supply customers.

The CBI wants the government to announce a detailed timetable for introducing a variety of new measures aimed at repairing the flow of credit.

Richard Lambert, the CBI’s director general, said: “We have urged the government to move as quickly as possible to set out when the various support packages to tackle the credit crunch will come into effect, and to implement them quickly. Day by day, constrained credit is damaging our economy. A lack of clarity creates a ‘fear the worst’ mentality and could be costing people their jobs.”

Ian McCafferty, the CBI’s chief economic adviser, added: “This survey clearly shows that obtaining investment capital is most challenging and that the credit crunch is affecting firms’ ability to operate. It is not surprising that some firms have started taking pre-emptive action to safeguard their longer-term future.”

The call for government intervention was echoed by the Federation of Small Businesses (FSB).

A poll of more than 4,000 FSB member firms revealed that over half have seen their trade decrease in the last two months.

The FSB argued that the findings suggest that recent government action to boost the economy – the 2.5 per cent cut in VAT, the introduction of the Enterprise Finance Guarantee, and calls for the public and private sector to settle their invoices more quickly – is not working.

Only eight per cent of small businesses said their banks were making the Enterprise Finance Guarantee available to them, while 53 per cent of those polled said they doubted that the scheme would compel the banks to start lending again.

The FSB data also showed that small businesses are increasingly being used as a source of credit, with 36 per cent having to wait longer to get paid for private sector work, even though the government’s Prompt Payment Code, launched last November, called for fairer payment practices between large and small businesses.

As for small firms with public sector customers, a fifth reported they are still waiting for longer than 10 days to be paid, this despite a government pledge that it would work with the public sector to speed up payment times.

In a separate FSB poll, 97 per cent of small businesses said the VAT cut from 17.5 per cent to 15 per cent has had no effect on their trade.

The FSB argued that more government measures were needed to stimulate the economy.

John Wright, the FSB’s national chairman, commented: “These startling figures show there is still more to be done by government and the banks to ensure businesses can survive in this economic climate.

“The government must use its meetings with the banks to monitor the guarantee scheme and assess why loans are still being refused, while both government and bank branch managers must do more to promote these funds.”

Mr Wright welcomed the introduction of the Prompt Payment Code but demanded extra enforcement to combat late payment: “We would like to see Companies House given sufficient power to penalise late payers in the commercial world while the government must do more to ensure the public sector does its bit to help the economy.”

He said that the small business sector is a vital source of employment and turnover for the UK economy but added that “these figures show that there is still an avalanche of stumbling blocks stopping this vital sector from surviving and recovering”.